Intertemporal Reversals of Environmental and Macroeconomic Policies

Abstract

The purpose of this paper is to indicate that (a) environmental and macroeconomic policies should be devised conjointly and (b) socially desirable responses of these policies to production-capacity stimuli and to changes in policy objectives commonly involve “intertemporal policy reversals”. We deal with environmental policies which restrict the flows of pollutants and with macroeconomic policies which influence aggregate consumption and production. In the context of a simple macroeconomic model (constructed in the spirit of d’Arge and Kogiku (1), Forster (2), Keeler, Spence, and Zeckhauser (3), Plourde (4), and Smith (5)) a socially optimal relation between environmental and macroeconomic policies is derived. We examine the dynamic adjustments of this relation to production-capacity stimuli (in particular, changes in the supply of non-nroduced resources and technological progress) and to changes in the policy-maker’s objective function (in particular, changes in his rate of time preference and changes in the relative valuation of environmental and macroeconomic goals). These adjustments commonly imply direction changes in the movement of the environmental and macroeconomic policy instruments through time.